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You’re Ready to Establish an ESOP — Now What?

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

The decision to establish an employee stock ownership plan, or an ESOP, should never be taken lightly. It’s important to not only understand if an ESOP is right for your business but also to determine if it’s even a viable option. If you’ve done your due diligence and are ready to move ahead, here are five steps to follow:

  1. Talk to a knowledgeable ESOP consultant.

This could be a trustee, a CPA, or an attorney who is experienced in ESOP transitions. This person can help you identify any preliminary issues with establishing an ESOP that you may have missed.

  1. Perform an ESOP feasibility analysis.

If you haven’t performed an ESOP feasibility analysis, this should be at the top of your list. You have to make sure your business has enough employees and annual revenues to make an ESOP work. Remember, a good rule of thumb to follow is 20 employees and at least $10 million in annual revenues. A feasibility analysis will help to verify that your company’s cash flow and testing ratios are sufficient.

  1. Organize your records. 

ESOP - Accounting Firms Minneapolis

You will be asked to provide a great deal of information during the ESOP transition. This information will primarily be used to gauge the feasibility of the transaction, but will also help to determine your sale price. The first piece of information you’ll need to produce will likely be your company’s financial statements for the past few years. Consider obtaining a review of your financial statements before this happens to ensure your numbers are accurate. Ideally, you should have three to five years of issued financials statements available to provide.

  1. Prepare projections.

When you sell a business, you are essentially selling its future cash flows. For this reason, the buyer (in this case, the trustee of the ESOP) will need this information to negotiate a sale price. Typically, you will be required to provide five years of projections.

  1. Create your team.

A successful ESOP transition requires a team. There are two teams for the transaction: one representing you, and the other representing the ESOP. The professionals you will need include a CPA firm such as JAK ; an attorney for your business, the ESOP, and you; a trustee; and a valuation company. Because you, as the business owner, are paying for both teams, an ESOP often becomes more expensive than other sale transactions.

Stay on track for a successful ESOP transition.

Following these five steps is key to ensuring the success of your ESOP. If you’re ready to begin the process, we can help you get started and provide support along the way. Give us a call today to learn more.

Thinking of an ESOP for Your Business? 4 Factors to Consider

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

Establishing an ESOP, or an employee stock ownership plan, might be the right option for your business, you, and your employees. If you’re thinking of implementing an ESOP, here are four factors you should consider first.

  1. Your expectations for the sale.

Do you wish to turn over your business to your employees, even if it means potentially leaving money on the table? Selling your business to an ESOP will almost always net fewer proceeds than if you were to sell to a third party. It’s likely there will also be more costs associated with becoming an ESOP than with a third-party sale.

  1. The size of your company.

To make the cash flow and annual retirement contribution limitations work, you must have enough employees, annual revenue, and net income. An accepted rule of thumb for establishing an ESOP is to have at least 20 employees who are qualified to participate in the ESOP and annual revenues of at least $10 million. For this reason, it’s important to perform an ESOP feasibility analysis before you get too far into the process.

  1. The strength of your management team.CPA firm St. paul - Strength Of Your Team

After you exit the business, who will take the reins? Having a strong management team in place—before you establishing your ESOP—will make the whole process go much more smoothly and likely increase your sale price.

  1. Your employee turnover rate.

If your business has a high employee turnover rate, an ESOP may not be the right choice. Employee continuity is important for a successful ESOP. Without consistent employee numbers and leadership, an ESOP may not be a good fit.

Is employee ownership an option for your business?

The benefits associated with ESOPs apply only in the right situation. Before you decide to implement an ESOP, do your homework. Make sure it’s the right call for you, your family, and your employees. If you’re wondering if an ESOP would be feasible for your business, the CPA firm of JAK can help. Give us a call today to get started.

5 Reasons Why Employee Ownership Could Be Right for Your Business

By

Kyla Hansen

By Kyla Hansen, CPA, CVA

An employee stock ownership plan, or an ESOP, is a retirement program that allows its participants to be owners of the company for which they work. As a business owner, you might consider an ESOP as a way to provide a valuable benefit for your employees. But this isn’t the only reason why an ESOP might make sense.

Here are five reasons why an ESOP could be right for your business:CPA Firm Minneapolis - ESOP

  1. You’re ready to start thinking of an exit strategy.

If you’re looking to transition out of your business, you have a few options: you can sell to an employee or family member, you can sell to an outside party, or you can implement an ESOP. Setting up an ESOP lets you transition the ownership of your business to your employees. This may make sense for you if you value giving back to your employees more than getting top dollar for the sale of your business.

  1. You want to attract and retain quality employees.

It can be difficult to attract talented employees, especially in today’s marketplace. As a desirable workplace benefit, an ESOP can serve to differentiate your business from competitors. Giving your employees ownership can also help to increase engagement and workplace morale.

  1. You wish to diversify your investment.

Is your business your largest asset? If so, establishing an ESOP gives you a way to redeem all or some of its stock, allowing you to reinvest those funds in other investments or companies. Depending on the circumstances, you may be able defer the gain related to the sale of the business if you invest it in qualified property under IRC Section 1042.

  1. Gain a competitive advantage.

When contributions are made to the ESOP, they are allocated into the individual participants’ accounts. Taxes on these accounts are due at the individual level when redemption of their ownership occurs. In most cases, if a company is a 100-percent ESOP, it does not owe income tax on company earnings. This tax savings can provide extra cash to use for revenue-generating initiatives, such as expansion.

  1. Give back to your employees.

The success of any business depends largely on the people it employs. An ESOP provides a way for you to give back to those who helped your business become what it is today.

Let us help you understand your options.

If you’re considering an ESOP, the team at JAK can help you explore your options. Together, we’ll discuss the pros and cons of an ESOP as they relate to your situation. To learn more about the benefits we’ve mentioned here, please give our St. Paul office a call.

Top 5 Ways the New Revenue Recognition Standard Will Impact the Construction Industry

By

Kyla Hansen

By Kyla Hansen, CPA

There’s been a lot of talk about the new revenue recognition standard and the effect it could have on the construction industry. Although the standard, known as Accounting Standards Update (ASU) 2014-09, was first issued by the Financial Accounting Standards Board (FASB) in 2014, it goes into effect for privately held companies—for periods beginning after December 15, 2018, to be exact.

This means that if you are a privately held company with a December 31 year-end, this change will impact your 2019 financial statements. The good news is percentage of completion isn’t going away! However, there are several nuances that will need to be considered.

Here are five changes you should be aware of:

1 – Combination and segregation of jobs will be based upon performance obligations

  • Contracts will now be defined and tracked by performance obligations—i.e., the underlying deliverables. This concept may cause certain contracts that have one shared performance obligation to be combined, even if they were previously considered separate. Additionally, this concept may also cause a contract to be segregated into separate pieces based on the number of performance obligations it includes. Going forward, each contract will need to be closely evaluated to identify performance obligations.
  • Change orders will also be impacted by this concept. Some change orders may create a new performance obligation, resulting in an additional job that would have to be tracked separately on the contract schedule, while others may not.   Construction CPA Minneapolis- Front-Loaded Costs

2 – Front-loaded costs will no longer recognize early profit

  • Significant costs incurred after a contract is obtained but before goods or services are transferred will need to be capitalized and amortized over the life of the contract. These costs include items such as mobilization and bond costs, and do not include bid, proposal, and selling or marketing expenses. This treatment applies only if all of the following criteria are met:
  • The cost directly relates to a specific contract
  • The cost generates or enhances resources that will be used in satisfying the performance obligation(s) in the future
  • The cost is expected to be recovered (directly or indirectly)

3 – The transaction price might not be the stated value on the contract

 When determining a transaction price, the new standards leave room for more judgment regarding the circumstances surrounding a contract and also allow for greater reliance on historical experiences. For example, if the contract is for time and material, the transaction price will represent the amount you anticipate the job to require. In addition, contracts will need to be evaluated if there are variable items such as contingent income or damage provisions. The new standards allow for several methods to evaluate the contract value. We expect the most commonly used methods to be the following:

  • Most likely value method: Used when there are only two possible values. You select the value that is most likely to occur.
  • Expected value method: Used when there is a range of possible amounts; each scenario is weighted based upon probability of occurrence. This determines the transaction price that you will use on your job schedule as the contract amount.

4 – Anticipate changes to your financial statements

  • Your balance sheets will include new items and names.
  • Contract assets: This will include costs in excess of billings, unbilled receivables, contract adjustments for variable consideration, and capitalization of costs to fulfill a contract such as mobilization and bonds. As I mentioned previously, these costs will be amortized over the life of the contract.
  • Contract liabilities: This will include billings in excess of costs, accrued warranty, refundable consideration, and customer deposits.
  • Retained earnings adjustment: If you adopt the new standard ahead of time, you will need to adjust your retained earnings to account for open contracts at the end of 2018 or restate your 2017 amounts in order to comply.
  • Additional footnote disclosures: There is a considerable amount of additional footnote disclosures that explain your policies and methods for determining contract prices and related revenue recognition.

5 – Understand the impact on your ratios

In light of the new standard, you may need to discuss modifying metrics used to determine items such as loan covenants or bonding capacity. For example, a lending agent might not give credit for a variable consideration contract asset.

Don’t get caught off guard.

The new revenue recognition standard will go into effect in less than two months, which means now is the time to get ready for the changes I’ve listed here—and the others I haven’t. Don’t forget: Team at JAK can help you pinpoint the ways your business will be affected, so you can prepare with efficiency. If you have questions, please please contact our St. Paul office today.

How Indirect Construction Costs Can Impact Your Profitability

By

Joy McAdoo

By Joy McAdoo, CPA

Keeping tabs on direct construction costs for a project is pretty straightforward. Take your materials costs, for instance: X number of beams used on the project multiplied by cost of each beam = total cost. Easy! Dealing with indirect construction costs, however, can be another story.

Indirect costs relate to the performance of the job, but they’re hard to track to a specific project. In other words, indirect costs might benefit multiple projects.

Here’s the thing: If you don’t have the full picture of your cost to complete a project, you’ll get a false sense of your profitability. That’s why it’s so important to track and allocate your indirect costs as accurately as possible. Here are a few tips for getting started.

Construction cpa St. Paul, Minneapolis

  1. Identify your indirect costs.

Indirect costs can generally be divided into two buckets: labor and equipment. Some contractors may use only one bucket, while others may use both.  Examples of costs that may be included in the indirect labor cost bucket include payroll taxes, workers compensation costs, and employee benefits. Examples of costs that may be included in the indirect equipment cost bucket include fuel, maintenance, insurance, and storage cost related to your owned equipment. The key is to decide what makes sense for your business to accurately determine your project-related costs.

So, we’ve covered labor and equipment, but what about the costs associated with running your business, such as general liability insurance, advertising, and office-related salaries? These costs are categorized as “overhead.” Although typically flat (i.e., they don’t fluctuate) and easier to predict, they’re often the hardest type of costs to allocate. That’s because it’s likely your overhead costs do support projects—just not 100 percent of the time. For this reason, it’s important to consider allocating some of your overhead costs to specific projects.

  1. Keep separate ledger accounts for each indirect cost bucket.

Once you’ve determined the items included in your indirect costs, it’s time to track them. First, make sure your general ledger has a separate account group for each indirect cost bucket you’ve identified. This is where you will post these costs. Often times a contra account, which is an account with a balance that is opposite of the associated account (e.g., a credit instead of a debit), will be used for each bucket to easily show the total amount allocated to the jobs. From a reporting perspective, this ledger setup will allow you to see a whole bucket of costs and compare the actual amounts incurred to the amount that has been allocated.

  1. Allocate indirect costs using a systematic and rational method.

Once you have your buckets set, you’re ready to allocate. While there are numerous ways to allocate costs, the method you choose should be systematic and rational. For instance, you could allocate labor costs based on direct labor hours incurred, or on a percentage of total cost per labor hour. Equipment costs could be treated in a similar manner—allocated by total equipment hours incurred.

Most often, contractors will estimate their total annual indirect costs for each bucket and set a predetermined rate to allocate those costs throughout the year. Others will use the actual cost incurred each month and allocate the full amount based on activity during that time period. The decisions surrounding how to allocate indirect costs will vary depending on the nature of your business.

  1. Let your accounting software share the load.

Many robust accounting systems have built-in functionalities for indirect cost tracking and allocation. This begs the question: Do you know what your accounting software is capable of? If yours has this functionality, you could automatically track and allocate indirect costs with little effort after the initial setup.

  1. Look forward to better insight into your business.

As I mentioned, keeping up with your indirect costs gives you a clearer picture of your profitability. Another benefit of tracking and allocating indirect costs is the ability to see your actual cost compared to what you expected. This is valuable information to have when bidding and estimating jobs. If you don’t know exactly what your indirect and overhead costs will be, how can you compile an accurate bid?

In order to successfully track and allocate indirect costs, you have to tailor the methods to your business. But don’t worry—at JAK we can help you figure out the right buckets and allocation approach, giving you the relevant financial information you need for increased profitability.

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John A. Knutson & Co., PLLP

John A. Knutson & Co., PLLP, (JAK) is a Twin Cities-based accounting firm serving clients throughout Minnesota and beyond. A Team Committed to Quality Beyond Expectations